The Force of Economics

Economics Is Everywhere

Ninos Malek teaches economics at Valley Christian High School in San Jose, California, and is an economics lecturer at San dose State University and DeAnza College.

A long time ago, in a galaxy far, far away . . . there were economists who tried to explain economics in clear terms. Unfortunately, there are only a few in the economics profession who are concerned with making the “dismal science” understandable to the average person. Most “high-powered” economists are more worried about the mathematical elegance. The verbal economist who can actually explain economic events is pushed aside as not being rigorous enough.

What’s worse, the average person doesn’t care about economics and doesn’t understand the power of economic reasoning. What usually comes to mind when hearing the word “economics” is investing, personal finance, or learning how to start a business. However, economics is everywhere whether it’s sports, fashion, music, or, yes, the movies! This is a statement that I have repeated several times to my high school economics class (I’m still not sure if they believe me or if they care). My goal as a teacher is to demonstrate to my students, first, that the study of economics is more than just focusing on financial topics and, second, that they have made economic decisions most of their lives.

One decision that most Americans make is to attend a movie or an athletic event. Listening to some people complain about how high movie prices are or that they can’t afford to take their family to a 49ers or Sharks game is a bit irritating. Maybe the price is out of the range for some to afford, but the fact is that prices are not too high the proof of this is that the theater or stadium is sold out. Theaters and professional sports teams would love to charge even more, but they can’t because fewer people would attend. And, of course, consumers would love to pay nothing to get entertained, but that won’t work either because suppliers would have no incentive to provide the entertainment.

Economic theory dictates that supply and demand determine the prices for goods and services. When demand decreases or supply increases for a product or service, the price, other things being equal, will fall. When demand increases or supply decreases for a product or service, the price will go up as it should. Any intervention to control prices would be, as the French classical-liberal economist Frederic Bastiat put it, plunder. The problem is that some people think it is their right to take their family to a movie or a hockey game. Consequently, when some are priced out of the market, they protest and call for a legal maximum price, or what economists call a price ceiling. Unfortunately, the result of this ceiling will be a shortage of tickets.

Then there are the people who can afford to pay the ticket price and do purchase it, but still complain about the high price. One of Adam Smith’s main insights in The Wealth of Nations is that unless both parties in an exchange think they will benefit, the transaction will not take place. Therefore, when a person buys a movie or hockey ticket, or anything, it demonstrates that that was the best use of the money compared to all other possible alternatives and, consequently, the benefits of the transaction outweighed the costs. In other words, these people should stop complaining.

A Better Theater

Smith’s famous statement, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest,” underlies a crucial concept. When the movie theater spends thousands of dollars on bigger screens and sophisticated sound systems, is it because the owner cares about you? Not necessarily. The theater spends this money because it is competing against other forms of entertainment for your dollar. By providing you with a better viewing experience, it benefits as well.

If prices are indeed too high, why do some people still go to the theater rather than wait for movies to hit the video stores? Some might say it’s because they do not want to wait. In economics jargon, they have a high time preference. There’s probably an additional reason: the feeling people get when sitting in a packed theater. Some feel a sense of connection with others when something inspiring or sad causes them to cry together. When someone does something without considering the costs or benefits to others, we call any side effect of that action an externality. Now I am almost certain that the people around me in the theater are not screaming, yelling, or crying because they are thinking about my enjoyment, or utility. Nevertheless, I still receive a benefit. (Of course, the screaming child or the talker would be an example of a negative externality.)

I recently encountered the power of economics in the movie that could financially surpass Titanic and Gone with the Wind (in both nominal and real terms): George Lucas’s Star Wars: Episode One, The Phantom Menace. It begins by stating that there is turmoil in the Galactic Republic because of the taxation of trade routes. The Trade Federation has stopped all trade with the planet Naboo, creating the conflict for the story. In the real world too, governments cause conflicts by infringing on individual freedom and imposing tariffs, quotas, and trade embargoes.

Money also provided a point about economics in The Phantom Menace. Money is anything that is generally accepted in trade of goods and services. In the movie our heroes need to replace a defective part on their spaceship when they land on the planet Tatooine. When Qui-Gon Jinn offers a merchant “Republic Credits” for the part, he’s told that these credits are worthless. An alternative to money is barter, so Qui-Gon has the ship checked for something tradable. He comes up empty-handed. This leaves no alternative but a risky bet that offers a high payoff. Yet again a simple principle of economics: it takes a high potential return to get someone to take a big risk.

Some of my students thought I was going overboard with my passion for economics when I told them that I wanted to write this article. I hope they’ll see what an enlightening tool economics can be even in their leisure time.

THE FREEMAN

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CURRENT ISSUE

December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.